Economic Growth

Question 1

Define Economic Growth

Answer 1

A sustained increase in a country’s productive capacity over time

Question 2

How is Economic Growth measured?

Answer 2

Economic growth is measured in terms of change in Real GDP:

EG (%) = Real GDP(y2) - Real GDP(y1)
————————————— * 100
Real GDP (y1)

Question 3

Hence, how is Real GDP calculated?

Answer 3

Real GDP = Nominal GDP
——————– * 100
CPI

Question 4

Define Aggregate Demand

Answer 4

Refers to the sum of expenditure on domestic output by households, firms, the government, and the foreign sector in an economy:

AD = C + I + G + (X - M)

Question 5

What is the Consumption Function?

Answer 5

C = Co + cY

Where: 
Y = Income 
C = Total consumption expenditure 
Co = Autonomous consumption 
c = MPC (Change in C/ Change in Y)

Question 6

What are the factors influencing Consumption?

Answer 6

Acronym: DICI

• Income
• Distribution of Income (more even > higher overall spending)
• Interest rates (higher IR > discourages spending)
• Consumer Expectations (E.g. Covid-19)

Question 7

What are the factors influencing Investment?

Answer 7

I = Io

• Changes in IR (higher IR > discourages spending)
• Changes in govt policy (e.g. tax concessions on I > increases I)
• Changes in price and productivity of labour (makes capital more/less attractive)
• Future Expectations

Question 8

Define Aggregate Supply

Answer 8

The total volume of g/s which all firms in the economy are willing to produce over a given period of time

Question 9

In equilibrium

Answer 9

Y = C + I 
AS = AD

Question 10

Injections and withdrawals impact on economic growth:

Answer 10

AD = AS - No movement
AD > AS - Increases
AD < AS - Decreases

Question 11

What is the simple multiplier?

Answer 11

Refers to the number of times by which a given change in spending must be multiplied to determine the ultimate or final change in income

Question 12

How is the multiplier measured? And how can it be used to determine the final change in income? How can it be used to calculate the new equilibrium level of income?

Answer 12

k = 1 / mps or 1 - mpc
Hence, for final change in Y…
ΔY = k × ΔAD where ΔAD can be a change in I, G, X
And the new equilibrium can be calculated by…
Ye2 = Ye1 + ΔY

Question 13

Factors that can increase Aggregate Supply:

Answer 13

AS is increased when there is an increase in quantity and improvement in the quality of the factors of production: 
- Population growth 
- Discovery of new resources 
- Workers acquiring new skills 
- Increased capital 
- Adoption of new tech 
- Measures to improve efficiency 
- Govt policies 
Acronym: WIGD MAP

Question 14

What are the positive effects of economic growth?

Answer 14

Acronym: HELA PINE

• Higher levels of saving (from increases in Y, retention in biz profits)
• Employment (EG > development of new and more advanced bizs > more highly paid/skilled jobs)
• Living standards (increase in real GDP per capita)
• Additional leisure time
• Productivity growth and tech progress (more access to better tech)
• Increase taxation revenue for govt
• New biz investment (EG > higher C > acceleration effect on I opps)
• Export Y (results in lower prices)

Question 15

What are the negative effects of economic growth?

Answer 15

Acronym: II DIMES

• Inflation (Occurs when spending is growing when eco is close to full capacity > growth in AS can’t keep up with growth in AD)
• Income distribution
• Demand-pull and Cost-push inflation (resources become scarce in relation to increased D for g/s)
• Increase in CAD and NFD to finance the deficit
• Materialism (EG shouldn’t be pursued at expense of declining values)
• Environmental Impacts (requires eco to break link between higher EG and greenhouse gas emissions)
• Structural UE (Govt will have to fund retraining schemes to re-skill structurally UE)